by Darrell Jobman, Editor-in-Chief, TradingEducation.com, LLC
Daily currency analysis
for Monday, February 4, 2008
The dollar was confined to narrower ranges on Monday as markets digested the events of last week. There were also no major fresh incentives which tended to stifle activity as uncertainty over the dollar’s direction persisted.
There was a slight recovery in risk appetite which curbed defensive dollar demand, but this was offset by optimism over potential merger-related flows into US markets.
US factory orders rose 2.3% in December with a 0.7% underlying increase for the month which was close to market expectations. There will be further intense debate over the US economy’s direction, especially after the conflicting reports last week. The PMI report for the non-manufacturing sector will be watched very closely on Tuesday, particularly as developments in the services sector will remain very important for short-term economic direction and market confidence.
The Euro-zone Sentix indicator weakened again in January which will reinforce expectations of a slowdown. There will also be uncertainty ahead of Thursday’s ECB council meeting, especially as ECB President Trichet’s stance on policy will be very important to the currency.
Markets will also be sensitive to comments on exchange rates from European officials ahead of the G7 meetings this Saturday. Any warnings over Euro strength would be liable to sap buying support.
The Japanese currency was slightly weaker in Asian trading on Monday with a move to near 106.80 against the dollar as carry trades were supported by a rise in the Nikkei index to an eight-week high.
The yen was also unsettled by further speculation that the Bank of Japan could consider a cut in interest rates given speculation over a deterioration in economic conditions.
Risk tolerances improved in Europe, but there was greater caution in New York trade and, after weakening to around 107.10, the yen pushed back to 106.80 as Wall Street was unable to make any headway.
Sterling found strong support below the 1.97 level against the dollar on Monday and strengthened to highs around 1.9780 before drifting weaker. Sterling was also unable to sustain a move through 0.75 against the Euro.
The latest CBI regional business confidence indicator dipped to a nine-year low and the latest construction PMI was weaker over the month, although it was comfortably above the 50.0 level. The Bank of England will still want to be cautious over cutting interest rates, especially as there was a further increase in the prices component in Friday's PMI report.
The report for the services sector will be very important for sentiment on Tuesday as a weak reading would increase pressure for the Bank of England to cut interest rates more aggressively while a solid reading would strengthen the case for a gradual approach.
Sterling will not gain strong support if the bank retains a restrictive monetary policy at a time of weakening growth.
The UK currency should still be able to gain some support from an improvement in risk appetite, especially if there is any evidence of increased demand for UK assets on valuation grounds.
The franc weakened to lows near 1.0920 against the dollar and 1.6185 against the Euro on Monday with a recovery in risk appetite contributing to the softer tone. The franc recovered from its weakest level as Wall Street drifted lower with the dollar edging back to 1.0880.
National Bank member Hildebrand stated that there were downside risks to the retail and export sectors which maintained the generally gloomy recent assessment of prospects from key bank figures. These concerns will undermine the Swiss currency to some extent, although global pressures will tend to dominate.
The Australian dollar continued to challenge levels above the 0.90 level and pushed to highs around 0.9050 in local trading on Monday. The domestic indicators were supportive with the trade surplus dipping to AUD1.9bn in December from AUD2.3bn the previous month while a private-sector inflation gauge increased to a 20-month high.
The main focus will be the Tuesday Reserve Bank interest rate decision and the Australian dollar will dip sharply if interest rates are not increased. The global developments will also be watched closely and a sustained net improvement in risk appetite would also tend to support the Australian currency. The Australian dollar held close to 0.91 ahead of the RBA decision.